Value Creation v. Value Capture


Tim J. Smith, PhD
Founder and CEO, Wiglaf Pricing

Published February 11, 2022

Three of the four Ps of marketing focus on creating value for customers.  Product management, which includes offering design, services, and help dialogues, enables customers to get more value from the company.  Placement, including channel selection, delivery, and availability, ensures value is given to customers.  Promotion, including salespeople, marketing communication, and branding, helps customers to perceive and acknowledge the value the company delivers.

The fourth P, pricing, is all about capturing value from customers.

Marketing Disconnect

Customer-focused executives, be they in sales, marketing, product management, or the CEO role itself, often find it difficult to shift gears from the value-creation mindset of the first three Ps to the value capture of the fourth P.  It can feel unnatural to stop thinking in terms of “how can I serve my customers better and make them like us and use us more” to “how much must they pay for me to serve them”.  It is as if pricing is an anathema of marketing.

It may not be as bad as in the movie Encanto where “No one talks about Bruno”, that “No one talks about price”, but it is close.  People talk about price and pricing all the time.  Yet they rarely talk about it as the business function it is.

Too often, executives focus on the question of “how low can I go” rather than “how high can I go” or “how much should a customer pay before we do business with them”. The result is a tendency to try to please customers with a low price rather than capture value.

It is as if people think a lower price creates value for customers.  Price is not a value-creating function.  It serves a value exchange function where the customer receives the value the company offers in exchange for payment of money.  It is that contrasting need, the need for the customer to receive the value the company has created in exchange for the company to capture its fair share of the value it delivers, that enables market exchanges to occur.

Realpolitik of Marketing

Pricing is the realpolitik of marketing.  It defines the nature of the relationship between the company and the customers it serves.

Despite all the platitudes company leaders deliver, the company isn’t in business to simply please customers.  It is in the business of making profits.  Price is how those profits are generated.

This isn’t to say that companies shouldn’t strive to create customer satisfaction.  Enough studies on Net Promoter Scores and Customer Happiness have been conducted to demonstrate that customer satisfaction is a necessary part of creating a healthy and sustainable business.

And this isn’t to say that companies should always put shareholders and profits as the only purpose.  Much evidence gives credence to the value of creating not simply shareholder value, but also stakeholder value, meaning employee, community, and customer value.

And this isn’t to state that the recent focus on ESG, meaning environmental, social, and governance issues, is unimportant.  Companies should do that as well.

But it is to state that companies need to deliver on all these things while also making a profit.

Pricing, meaning capturing value from customers, is how companies make a profit.  To cede on pricing is to cede profits to customers, which is exactly counter to the role of pricing.

Pricing forces customers to address a specific question: “Do I believe this offering has value to me above the price?”  If so, the company can capture its fair share of the value it created for its customers.  If no, that entity, be it a business or a consumer, is not a good customer.

Practical Reality

Customers may not like higher prices, for everyone would like to have everything for free. But a customer that doesn’t pay its fair share to the company isn’t a customer, it is a leech sucking the lifeblood of profits out of the company.

Serving leeches is a sure way to go bankrupt.  Just ask the past executives of Pilgrim’s Pride Chicken, Hostess Brands, WeWork, and several other past reputable (or disreputable) businesses that have gone under by chasing market share and cost reduction but ultimately did too much unprofitable business.

No, forget the leeches.  Serve customers.

Customers are, by definition, profitable.  Meaning they pay a fair price where fair implies the company is capturing its fair share of the value it created for the customer.

Saying “no” to leeches may make one in marketing, sales, or with a customer orientation uncomfortable.  But saying “no” leaves energy and breath to say “yes” to an actual customer.

Reconnecting the Fourth P

Today, as we go through pandemic-related inflation, companies are forced to address the practical issue of raising prices.  Repeatedly I hear fears of losing market share and volume as they consider higher prices.  Repeatedly I hear executives express fear when they consider talking to major customers and demanding higher prices (as if the word “demand” is even forbidden in conversations about customer relationships).  Repeatedly, I hear the words “we can’t”.

But, for many companies today, we must.  Logistics, inputs, labor, packaging, and much more are increasing in cost.  Companies must share some of this burden with customers or face profit reductions if not outright losses.  Carol Tomé faced this challenge and raised prices at UPS and as a result UPS is thriving right now.

Delivering excellence in product, placement, and promotion must be connected to excellence in the realpolitik of business in capturing pricing from real customers.

About The Author

Tim J. Smith, PhD, is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right (Wiley 2016) and Pricing Strategy (Cengage 2012). At Wiglaf Pricing, Tim leads client engagements. Smith’s popular business book, Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, was noted by Dennis Stone, CEO of Overhead Door Corp, as "Essential reading… While many books cover the concepts of pricing, Pricing Done Right goes the additional step of applying the concepts in the real world." Tim’s textbook, Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, has been described by independent reviewers as “the most comprehensive pricing strategy book” on the market. As well as serving as the Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, Tim is a member of the American Marketing Association and American Physical Society. He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago GSB.